Climate Patents and Financial Markets

We study the reaction of financial markets to climate patent grants. We show that innovating firms are rewarded with significant positive stock returns over a 12-month horizon, and find concomitant trends of reduced costs of capital, shareholder rotations towards environment-focused institutional investors and better environmental ratings. We do not observe similar reactions for other patents, including other green patents. We corroborate the distinctive nature of the market reaction to climate innovation by showing that it is amplified during periods of high attention to climate change, for firms with high climate exposure, and for first-time grants of climate patents. Throughout, we exploit quasi-random variations in patent examiner leniency to address endogeneity, comparing firms with fortuitous climate patent grants to similarly innovative but unlucky firms. Random grants of climate patents do not produce improvements in the innovator's operating performance or carbon emissions, but the underlying climate technologies do, suggesting that financial markets react rationally to the signal value of climate patent grants.